Debt Consolidation Loans: What are they and where can you find the best ones?

Debt Consolidation Loans

What's in our guide to debt consolidation loans?

What are debt consolidation loans

Managing and keeping track of several debts at a time can be tricky but a debt consolidation loan can help remove the hassle of different bills. Here we'll go through what debt consolidation loans are and the best debt consolidation loans on the market at the moment.

It is a form of personal loan that you put towards paying off all your debts such as credit cards or overdrafts.

The benefits of debt consolidation loans

Getting a debt consolidation loan removes the hassle and worry about following and meeting different payment dates or minimum amounts and can make it easier to keep track of your debts.

It also helps with cashflow as the same amount of money will be coming out at the same time each month.

You should also be able to lower your monthly repayments in contrast to what you are currently paying on all your credit card or overdrafts.

The risks of debt consolidation loans

Your monthly repayments may be lower but you could end up paying back more than what the debt is worth depending how long the loan is and if there are any fees.

A debt consolidation loan isn’t necessary a solution if you are regularly getting into debt as it is just swapping one type for another and if you can’t keep up with these repayments it could harm your credit rating.

Do consolidation loans hurt your credit score?

All forms of debt are registered on your credit report and score which lenders use to consider applications for finance such as a mortgage or further loans.

Your score could be impacted if you miss repayments on a debt consolidation loan and if you make too many applications as lenders may be wary of how much you rely on credit.

Top five debt consolidation loans in the UK

  • Cahoot - Provided by Santander, Cahoot has the lowest rate currently on the market at 2.8% APR. You can borrow up to £20,000 for between one and five years and need a minimum income of £6,000. The loan can be repaid early but Cahoot may charge an extra 30 days’ interest..
  • Clydesdale Bank - Clydesdale Bank offers a rate of 2.9% APR for between one and seven years on up to £25,000. You can repay early but will be charged an additional 58 days’ interest.  You will need a minimum income of £15,000.
  • Nationwide - If you already bank with Nationwide you could get a personal loan rate of 2.9% APR to borrow up to £25,000. Existing customers will need a minimum income of £9,000 and can borrow for up to seven years. There are no charges if you want to settle your loan early.
  • First Direct - Loan rates get pricier when you are looking to borrow beyond £25,000. First Direct offers loans of between £25,000 to £30,000 for 3.3 per cent APR for up to seven years for its current account customers.
  • Barclays Bank - If you are a Barclays customer and have really large debts, you could get a personal loan of £50,000 for 5.9% APR. This is only for its existing premier account customers though. Alternatively, Tesco Bank offers 6.6% APR on a relatively high personal loan of £30,000 to £35,000 for new and existing customers.

How to compare debt consolidation loans

Compare the new loan with your existing circumstances and whether you will be better off.

You should compare loans on the interest rate, term but also if there are any fees or interest charge for repaying early. Some may also offer repayment holidays or have rates only available for existing customers.

Some providers may only offer debt consolidation loans to certain age groups.

Check if you can do a soft search to see if you would be eligible for a loan as it may harm your credit rating if you make too many applications or are rejected.

Alternatives to debt consolidation loans

  • Balance Transfer Credit Card: A personal loan isn’t the only product that can consolidate debts. You could also use a balance transfer card. This pays off credit card debt and moves it to a new provider where in some cases you can make interest-free repayments over a long period.
  • Remortgaging: Homeowners could be better off remortgaging especially if you have a large debt. Mortgage rates are at record lows and if you have enough equity in your home you could release some of the cash through a remortgage to settle other debts. This will increase your mortgage payments and puts your home at risk if you fall into arrears.
  • Debt Management: Rather than taking on more debt, it may be possible to arrange a debt management plan. This is an agreement between struggling borrowers and lenders to help setup more manageable repayments. A debt adviser can help arrange this or you could speak with charities such as StepChange, Payplan and National Debtline.
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